On June 1, 2009, Dennis Rousseau gave a presentation on the Pre-Owned Market Perspective at the Aviation Professionals Conference. The talk was well received and we have decided to post the contents. We will break up the presentation into a series of posts.
Pre-Owned Market Perspective: Part I
Business aviation has historically been a cyclical industry impacted by many factors, including the U.S. economy. However, the downturn our industry is experiencing now is unlike anything we have been through before. Up until September 2008, we were chugging along enjoying moderate business cycles and unprecedented global growth, when suddenly, all hell broke loose. We are seeing the worse downturn in the history of our industry with 20,000 layoffs and climbing. From unexpected earnings results, missed market opportunities to product launch disasters, we have come to expect uncertainty as an unavoidable fact of business. However, even the worst business surprises rarely happen without warning and a few vital pieces of information can make all the difference. Over the next few posts, we will examine these warning signs, compare where we started from with where we are now and put all of this data into perspective.
The Dot-com era was a speculative stock market bubble that started in 1995 and peaked in March 2000 during which markets saw their value increase rapidly. Companies were seeing their stock prices shoot up simply by adding a .com to their name. However, the prices lacked fundamental. A combination of increasing stock prices, speculation in stocks, low interest rates and an abundance of venture capital created exuberance and many companies dismissed standard business models, focusing instead on increasing market share at the expense of the bottom line.
In March 2000, the US economy sank into a recession when the NASDAQ crashed following the collapse of the Dot-com bubble, wiping out $5 trillion in market value of tech companies. This ended the longest economic expansion on record, during which time business jets were selling at premiums. A 1986 GIV that sold new for $16M, was selling for $20 – 25M. Buyers were losing site of the fundamentals in our business:
- Aircraft are depreciating assets, a piece of metal with an expiration date stamped on them.
- Prices in overheated markets must come back down to the mean.
More to the point, we lost sight of how economic fundamentals affect our market.
The Dot-com bubble in and of itself was not the impetus for the recession. In August 2001, Enron claimed revenues of $100B and was named “America’s Most Innovative Company” by Fortune magazine for the 6th year in a row. Within a couple months, it was discovered that their financials were fraudulent. They filed bankruptcy in Dec 2001 subsequently causing the dissolution of Arthur Andersen, which in turn affected the wider business world.
After the events of September 11th, the Dow suffered its worst loss in history. The market rebounded, and then crashed again in 2002. In the interim, WorldCom filed for bankruptcy, which at the time was the largest filing in US history.
Having laid out this background, consider this question. Is there a corollary between the rise and fall of the Dow and aircraft pricing? We at AircraftPost tracked the selling prices of medium and long-range business jets over a 20-year period. We then averaged them by quarter and overlaid this data on market indicators. This is a snapshot of the results over the last 9 years comparing the actual selling prices of used GVs to the Dow.
We then looked closer at the highs and lows of the Dow and found that aircraft sales mirrored the fluctuations by 12 – 18 months. The Dow hit a high of near 14,000 in Oct 2007 and started its decline directly after. However, pre-owned aircraft sales continued at a brisk rate thru the end of 2008. At the high end of the market, we saw extraordinary pricing: a GV selling for 46M, a 550 at 58M, a 2000 EASy for 35M, a straight 2000 for 25. People go crazy periodically, in all kinds of ways. But when you get prices increasing faster than the underlying costs, there can be some serious consequences.